Qualitative Analysis

 

Qualitative analysis considers the followings: business model of a company (what a company does), competitive advantage (what drives a company’s success? Is it a brand name, long-term dominance in the market or barriers to entry in the market keeping competitors from entering?), management team’s capability, corporate governance and board structure (how’s the relationships and responsibilities among management, directors and other stakeholders – employees, managers, customers, suppliers and investors? Is the company run in ethical, transparent and efficient ways?) and industry trends (customer base, market share among companies, competitive landscape, regulation, industrywide growth and business cycle)

 

 

Quantitative Analysis

 

Income Statement:  It shows how much money a company is making in terms of revenues, how much it is spending in terms of expenses and what’s left, in terms of profits or losses. Profit trends tell investors if the company is growing or struggling.

 

Balance Sheet: This shows a snapshot of what a company owns in terms of assets, and what it owes in terms of liabilities, and what is left in terms of shareholders’ equity. Balance sheet shows financial stability and liquidity of an entity. Investors can also assess the company’s financial leverage by looking at its debts relative to its equity.

 

Cash Flow Statement: This statement shows how much cash is coming in and going out of company over a period of time. Cash flow from operation shows the money generated from the company’s core business activities, cash from investing shows the money spent or earned from investments not related to the company’s core businesses, and cash flow from financing refers to the money raised to fund the businesses or paid out to investors. It shows the company’s ability to generate cash, pay the bills and invest for growth.

 

Fundamental analysis looks at a company’s key financial ratios such as followings:

 

Profitability ratios: gross profit margin ((revenues – costs of goods sold) / revenues), operating profit margin (operating income / revenues), net profit margin (net income / revenues), return on assets (net income / average total assets), return on equity (net income / average shareholders’ equity), measuring efficiency and financial performance

 

Liquidity ratios: current ratio (current assets / current liabilities), quick ratio ((cash + marketable securities + account
receivables) / current liabilities), evaluating a company’s ability to meet its short-term liabilities

 

Solvency ratios: debt-to-equity ratio (total liabilities / total shareholders’ equity), debt-to-assets ratio (total liabilities / total assets), interest coverage ratio (operating income / interest expense), assessing financial stability and long-term debt management capabilities

 

Efficiency ratios: asset turnover (revenues / average total assets), inventory turnover (costs of goods sold / average
inventories), receivables turnover (revenues / average account receivables), showing how effective a company can utilize its assets to generate revenues 

 

Valuations: price-to-earnings (market price per share / earnings per share), price-to-sales (market price per share / revenue per share), price-to-book (market price per share / book value per share), dividend yield (annual dividends per share / market price per share) to determine if a stock is undervalued or overvalued relative to its peers in the same industry 

Investors focused on fundamental analysis need to look at the overall state of the economy the company is operating in and compare its business to competitors in the sector as well.